No matter what the current market conditions,
it is always a good idea to be ready for a sudden pullback.

How can you do this? By buying put options.

A put option profits if a stock declines in
price. It is almost like having an insurance policy on your investments.

New option traders might be surprised that
you can make money if a stock goes down -- but you can! It‘s just one of
the great things about options.

A put option gives its owner the right to
sell the underlying stock at a specified price. When you buy a put option
you want the stock price to fall. Even if it falls to zero, your put option
gives you the right to sell it at the specified price.

For example, in October 1987 option trading
was temporarily suspended due to “fast market” conditions. That is when
put owners had to actually buy and then sell the stock to collect their
profits.

The mechanics of such a situation are this:
Let’s say you buy a put option that gives you the right to sell the
underlying stock at a price of 30, and the stock falls to 20. You can buy
the stock at 20, and then use your put option to sell it at 30, for a
10-point profit.

Fortunately, that gain will also be reflected
in the price of the put option. So most of the time you won’t have to buy
and then sell the stock. You can simply sell the put back to your brokerage
to collect your profits.

Put options also have another valuable
function. You can use them to shelter your stock portfolio from a market
decline.

In this day and age computer-driven trading
and push-button money transfers can cause sharp sell-offs almost overnight.
In such a scenario most investors will be unable to get their money out in
time.

So it pays to have some "portfolio
insurance" to guard against this kind of collapse.